This EU case centered around whether a taxable person who made temporary use for private purposes of part of a capital item forming part of the assets of their business was entitled to deduct the input VAT on the expenditure incurred in carrying out permanent alterations to that item even though those alterations were carried out with a view to temporary use for private purposes

Background

The taxpayer was a Dutch commercial partnership of two natural persons who bought a commercial warehouse which they used for the purposes of their business as wholesalers of car paint. Part of the attic of the warehouse was adapted for temporary occupation by the two partners and their children and VAT was charged for the work. The work consisted of the installation of two dormer windows, a vestibule, a bathroom and a toilet. During the work and following it, the attic was used as a dwelling for a total period of 23 months and thereafter it was adapted for business purposes.

The taxable undertaking deducted the VAT charged on the alteration work on the attic in full. However, the Dutch tax authorities refused to allow the deduction in so far as it related to the work on the dormer windows and the vestibule, as only the installation of the bathroom and toilet served the business purposes of the undertaking.

The court of first instance upheld that decision on the grounds that the work on installation of the dormer windows and the vestibule was carried out purely for the purposes of occupation by the two partners.

The taxable undertaking lodged an appeal against that decision with the Hoge Raad der Nederlanden, which then referred the matter to the Court of Justice for a preliminary ruling.The issues to be decided were whether the taxpayer who made temporary use for private purposes of part of a capital item of his business was entitled to deduct the input VAT levied on expenditure incurred on permanent alterations carried out exclusively with a view to that use for private purposes; and whether it made any difference whether the taxpayer was charged VAT, which he deducted, on the acquisition of the capital item.

Decision

The ECJ (ruling accordingly) said that it was the acquisition of an item by a taxpayer acting as such that gave rise to the application of the VAT system and therefore of the deduction mechanism. The use to which the item was put, or intended to be put, merely determined the extent of the initial deduction to which the taxpayer was entitled under Article 17 and the extent of any adjustments in the course of the following periods. By contrast, where a taxpayer acquired goods solely for his private requirements, he was acting in a private capacity and not as a taxable person within the meaning of the sixth directive.

It was in particular a taxpayer's intention, confirmed by objective evidence, to use an item/service for business purposes which made it possible to determine whether, at the time when he carried out the input transaction, the taxpayer was acting as such and was therefore entitled to deduct the VAT payable or paid in respect of that item or services.

In the present case, it had not been clearly established that, at the time when the alterations at issue were carried out, the taxpayer had the intention of using them exclusively for his private purposes.

Turning to look at the objective evidence which could be used to assess whether, in a particular case, a taxpayer had acquired goods for the purposes of his economic activity, that evidence included the nature of the goods concerned and the period between the acquisition of those goods and their use for the purposes of the taxable person's economic activity.

Although it was for the national court to determine the factual situation in a particular case, the ECJ could provide it with guidance as to interpretation that might be helpful. In this particular case, it could not be disputed that the windows and vestibule could be used both for private and business purposes. Furthermore, as the items in question were not removed and were left in place, those items might be regarded as having been subsequently used for business purposes. This was even more so as they were an integral part of a building which formed, in its entirety, part of the assets of the business.

Finally, during the 23 month period when the capital items were used to adapt part of the warehouse for use as a dwelling for exclusively private purposes, this could not, having regard to the durable nature of that item and its foreseeable lifespan, generally be considered to constitute evidence which supported the conclusion that the taxpayer did not have the intention of using that item for the purposes of his business.

If the national court came to the conclusion that, at the time when the costs for the alterations at issue were incurred, the taxpayer did not have the intention of using the capital item resulting from those alterations for the purposes of his business, then he could not be entitled to deduct the VAT relating to the alterations.

However, the national court might find that the taxpayer had the intention of using the capital item for the purposes of his business. A use such as that envisaged in the main proceedings could be regarded as constituting mixed use, within the meaning of case-law, of a capital item which formed part of the assets of the business. Since, in the situation envisaged, the capital item at issue in the main proceedings formed, in its entirety, part of the assets of the business, its use for private purposes had to be treated as a supply of services for consideration within the meaning of Article 6(2)(a) of the sixth directive and taxed as such.

If the taxpayer was charged VAT on the purchase of the warehouse, the taxable amount for the private use of the attic would consist of a part of the costs of acquiring the warehouse and of the expenditure in respect of the alterations. By contrast, if the taxpayer was not charged VAT on the purchase of the warehouse, the taxable amount relating to the private use of part of the warehouse would consist solely of the expenditure in respect of the alterations.

Therefore it followed that Articles 6(2), 11A(1)(c) and 17(2) of the sixth directive meant that a taxable person who made temporary use for private purposes of part of a capital item forming part of the assets of his business was entitled to deduct the input VAT on the expenditure incurred in carrying out permanent alterations to that item even though those alterations were carried out with a view to that temporary use for private purposes; and that right to deduct existed irrespective of whether the taxable person was charged VAT and deducted that VAT on the acquisition of the capital item to which those alterations were made.

The full text of the case is available at http://curia.europa.eu/juris/liste.jsf?num=C-334/10